Midcap Funds: Why They May Be the “Just Right” Investment for You

Midcap stocks have the potential to provide performance similar to that of small-cap stocks with less of their volatility.1 For investors looking to more fully diversify their stock investments, midcap stocks may be a sound choice. Midcap stocks are stocks of those companies with market capitalization (stock price times number of shares outstanding) of between $1.4 billion to $5.9 billion.2 As their name implies, midcap companies fall between small-cap and large-cap companies. The middle ground occupied by midcap companies and their stocks represents unique risk/return characteristics for investors.

The Potential for Strong Returns, Less Volatility

One attractive attribute of midcap stocks is the potential to deliver performance that is on par with or better than that of small-cap stocks, typically with less risk (as measured by standard deviation).3 For example, over the past 30 years, midcap stocks have delivered an annualized return of 13.31% compared with 11.90% for small-cap stocks.3

In addition, midcap stocks typically have earnings growth rates on par with those of small-cap stocks, but more rapid than those of large-cap stocks. Moreover, midcap stocks typically maintain lower price-to-earnings (P/E) ratios than their large-cap counterparts. Combined, these features may mean that midcap investors can buy the potential for significant growth at attractive prices, although past performance is no guarantee of future results.

Midcap stocks may also share the following potential advantages:

  • Midcap companies are established businesses -- These companies have survived the formative years and may bear less of the entrepreneurial risk associated with many small-cap companies.
  • Midcap stocks are underfollowed by Wall Street -- Investment analysts typically don't follow midcap stocks as closely as they do large-cap stocks. As a result, investment professionals who follow midcaps may be able to obtain a unique view of a company.
  • Midcap companies hold potentially defensible competitive positions -- Well-known brand names -- think Domino's Pizza, Autozone, and Hershey's -- could make it harder for new kids on the block to compete against these pros.

Just Right for You?

One way to participate in the potential long-term benefits of midcap investing is to buy shares of a midcap stock. Keep in mind, however, that midcap stocks have the potential to experience significant volatility. Therefore, be sure to consider your time horizon and comfort level with risk before investing.

This communication is not intended to be investment advice and should not be treated as such. Each individual's situation is different. You should contact your investment professional to discuss your personal situation.

1Past performance is no guarantee of future results. Securities of smaller companies may be more volatile than those of larger companies. The illiquidity of the small-cap market may adversely affect the value of these investments. Midcap companies often have greater price volatility, lower trading volume, and less liquidity than larger, more established companies. These companies tend to have smaller revenues, narrower product lines, less management depth and experience, smaller shares of their product or service markets, fewer financial resources, and less competitive strength than larger companies. For these and other reasons, investments in midcap companies carry more risk than investments in large-cap companies.

2Sources: Standard & Poor's, S&P Dow Jones Indices, U.S. Indices Methodology, January 2015.

3Based on annualized returns for the 30-year period ended December 31, 2014. Midcap stocks are represented by the S&P Midcap 400, an unmanaged index designed to measure the performance of 400 mid-sized companies in the United States. Small-cap stocks are represented by the S&P SmallCap 600, an unmanaged index designed to measure the performance of 600 small-size companies in the United States. Individuals cannot invest directly in any index. Past performance is no guarantee of future results.

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Post by Phil Ratcliff

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